The Tendency of Regional Integration in China: Incentive, Pattern, and Growth

We analyze the trend of regional integration (or local protection) in current China through exploring its effect on local growth rate. Given specified assumptions on the endogenous growth model refined from Chinese characteristics, we show that any form of economic integration always makes both regions better off. Even with completely local protection for commodities flow but having technology flow, the new balanced growth rates for two regions integrated are still higher that that under autarky, if both have different level of technology. However, in the poor region with assumed low level of technology its manufacturing sector will be reduced, and its human capital in the R&D sector will move out to the manufacturing sector, or to the R&D sector in the rich region if this flow is allowed. Under completely economic integration with free commodities and technology flow, the new balanced growth rate is higher and the human capital in the R&D sector in both regions will be same as before integration. That is the incentive for closer economic integration. The interesting thing we show is the possibility to have a worst situation that both regions have the same level of technology and there is completely local protection, and that both regions have different level of technology but one region focus on the gap of growth rates between regions. Then the balanced growth rate will be lower than that under autarky.